Scaling Goal-Based Advice While Satisfying Compliance Standards

Advisors face a common dilemma: managing assets to meet a client’s stated risk tolerance with full knowledge that other assets exist that are “held away”, which are defined as accounts not actively managed by an advisor or custodian affiliated with the advisor’s financial institution.

For example, suppose a client has placed $1 Million with an advisor to meet a future capital accumulation goal in 10 years, and is comfortable with only a moderate level of risk. Given the time constraint, reaching the goal may be a stretch, unless the client either extends the time period or assumes more risk than is prudent. However, further suppose that the advisor is aware of an additional $1 Million pool of client assets held away. Theoretically, the risk tolerance on a combined portfolio of $2 Million could remain consistent with the client’s original risk tolerance, all things being equal, and the future capital goal could be achieved within the client’s stated time frame, given that there are more investible assets to work with. However, FINRA 2111(The ‘suitability’ rule) says the dually registered advisors, acting in a registered representative capacity with the broker dealer must have a reasonable basis to believe that a transaction is suitable for a client, based, in part, on the client’s profile. That profile may include other investments which may not be managed by the advisor. Furthermore, those assets held away may directly affect the client’s overall risk tolerance, rather than only those assets under advisement. It can create a conundrum: how to access information pertaining to all assets (not just the ones under the advisor’s purview) to make prudent recommendations and adhere to the best interest of the client.

Simple Goal. Complex Execution

The Unified Managed Household (UMH) was intended to help solve that problem. Unfortunately, it didn’t deliver on the promise. It was a good idea: a way to aggregate accounts that cannot be combined, perhaps for tax reasons, and still offer advice on their merits in an asset allocation. The underlying technology was the key, and unfortunately, it frequently got stuck in the weeds—focusing on the reporting function—rather than streamlining portfolio management. What was missing was deep integration with the advisor platform to allow viewing of and reporting on all assets.

Some drawbacks are apparent. For instance, account data required to structure a comprehensive investment strategy can be different depending on the platform on which the account is housed, and thus may require manual rebalancing across different account registrations. Another obstacle is software limitations (once the transfer of account information is completed) when attempting to align it with a client’s goals.

In addition, a fully integrated plan mandates that capital markets assumptions be synchronized across all accounts. Assumptions on rates of return, for example, need to be applied consistently to various asset classes.

Driving Value Through Simplicity

From a client’s perspective, the technology solution also needs to be engaging, and needs to both educate and communicate. It should have core functionality that lets the client toggle different assumptions and see projected results. For example, some clients may be reluctant to bother the advisor with what could be construed as a naïve question, such as modifying risk tolerance or reducing investment dollars in a given year. Giving a client the opportunity to play with these “what if” options, as well as to revise different retirement dates and investment returns to determine a projected income stream, is key. Add in the ability for the client to see all accounts on a single page: a total plan, with all investments, in real time.

The right technology also can make the advisor’s life easier, certainly with respect to reporting. Ideally, the advisor wants to generate customized reports with various bells and whistles, and deliver them either electronically or in print form. Many advisors are burdened with the time-consuming task of generating reports, and most would welcome being able to create and save compliance approved templates to deliver future reports seamlessly.

Other things may be on an advisor’s wish list. Beginning with the paperless onboarding process, and extending through investment selection, trading, and rebalancing, all information should be accurate, recent, retrievable and comprehensive, thus reducing the notoriously complex compliance requirements. Second, all assets (no matter where they are held), need to be centralized, so the advisor can have available the detailed information needed to adhere to regulatory standards. ,

And because every advisor must accommodate clients by managing smaller, unprofitable accounts from time to time within the framework of a larger relationship, technology needs to make that task easier and more efficient. Frequently, those accounts are owned by younger clients, who use products and services differently from their parents’ generation, and they want their advisor to be on the cutting edge of new technology. Whether it’s a new app, product extension, or information resource, the way it’s delivered can go a long way to build and cement a loyal and lasting advisory relationship.

An Integrated Solution

In the past, planning and investment implementation were two parts to the whole. The process required two separate platforms, and was cumbersome and inefficient. Today’s technology can integrate both planning and investing, and promises true operational efficiencies and clear client communication.

Clients and advisors alike now can access sophisticated technology with tools to structure the portfolio and make ongoing adjustments in response to changing capital markets conditions. Core functionality means modifications can be synchronized across all accounts, making it relatively simple to examine and address goals, cash flows, and tax planning guidelines. It translates to one-stop shopping for advisors, thereby negating the need for multiple research and information portals to design an array of options. Regular releases that deliver new enhancements keep advisors current and offer their clients a range of capabilities under a single, user-friendly platform.

Leverage and Scale Drive Value

Advisors need a forward looking and innovative business model to drive a higher practice value and deliver a better service product to their clients. Letting technology do the work of integrating accounts and searching for data means advisors are free to focus on what counts: serving their clients, and doing it better. That’s the way to drive value.